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Retire on Social Security: Why?

Tuesday, June 22nd, 2010

Retire on Social Security

Are you going to be one of those who pay careful attention to your quarterly letter from Social Security? (if you are not old enough to be getting one, just wait.)

  • Letting you know what your benefits will be.
  • Trying to decide “Should I retire at 62, 65, or 66 1/2 to get the most out of the system?”
  • Decide whether it would be better for you or your spouse to retire first to maximize your check.

Are you one of those people- who pay attention to articles such as this one at Yahoo Money, “5 Places to Retire on Social Security“?

Forgotten - Photo by Alex E. Proimos

Are you one of those people-worried about having to choose between buying meds, meals, or cat food on your social security check?

Are you one of those people-who argue and worry about whether your money taken out of your check for social security will ever get back to you?

Are you one of those people- concerned about your quality of life, when you retire.

Blog Goals

My goal here at The Millionaire Nurse Blog, is to help you not give a damn about Social Security!

You will be in charge of your retirement, not the government.

But this won’t happen without your making up your mind that you are going to change your relationship with money, today!!!!

What Can You do to not need Social Security?

  • Begin to make debt your enemy, and decide not to spend without a plan. Remember your ultimate financial and personal goals.
  • Get on the same page as your partner/spouse regarding your finances.
  • If you are one of those who have trouble managing your money, then grow up-you need to take care of you!

Let me help:

Reader Questions?

Do you think you will need Social Security when you retire, or will that be your vacation fund?

Do you think Social Security will still be around when you hit retirement age?

Do you want to have to think about where your small check will last the longest or live where you WANT to live?

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Posted in Retirement savings | 2 Comments »

Financial Risk: Do You Really Understand It?

Tuesday, June 15th, 2010

Risk

Risk, risk/reward ratio-we  think we know what risk is.

We hear about risk all the time-sometimes in oblique ways-”That  BB gun will put someone’s eye out!!” as Ralphie heard over and over in A Christmas Story.

Don’t drive too fast, wear your seat belt, don’t swim on a full stomach, are all common comments.  And these days, more and more are concerned about the risk of the stock market!

Your Biggest Risk-May Be Income Related-Not Stock Market Related!

There is an interesting article in the WSJ about Thinking Smarter About Risk by Professor Moshe Milevsky. He suggests thinking about what would happen to your earnings or paycheck if the stock market crashed 25 or even 50%.

He gives a good explanation of the term-Beta.  Beta, in stock market parlance, is the risk of a stock-as compared to the market as  a whole-if the stock has twice the market risk-then it has a Beta of 2.

If it has the same risk as the market then the Beta is 1, and if the stock has no correlation to the stock market-then the Beta is zero!  He points out that our jobs also have a Beta-our future income may be correlated to the stock market, or completely uncorrelated.

Most nurses would see very little change in their earnings capacity-with a stock drop-so their Beta may be closer to zero.  Their earnings risk may be tied to the health care bill, but not really the financial markets.

(Maybe we should come up with a risk variable on how our incomes are tied to congress and new laws and regulations-Alpha and Omega risk ratio, perhaps!)

But most in the financial world-bankers, brokers, and brokerages, and thousands of their support staff would be devastated by another severe, prolonged market correction. Not just in their investments, but the job itself, and it’s lifetime of  income!

Dr Milevsky’s point is that our financial risk is many times much more correlated to our career earnings and income, rather than our investments.   And we need to adjust our thinking to account for that risk.

What does this personal financial risk mean to you and me?

  • Keep an eye out for changes in the industry you are working  that may effect your future income.  If you are working in the insurance, medical device, or pharmaceutical industry-your risk of your companies’ financial health deteriorating may be increasing-so make adjustments in your savings-to be prepared for further layoffs or income shifts.
  • If you are working for a hospital, whose profits are being squeezed by decreased reimbursements-realize much deserved raises may just be a dream so adjust your spending-or find other ways to increase your income-or both.
  • If you are  at your pinnacle of pay-reached the glass ceiling-and are comfortable with that-you have savings built up-then you can take more risks with your investments-than someone just starting out.  Standard thinking is that as you get older, you decrease your risky investments-it may be time to consider increasing the risk slightly-as you can deal with the downside more.
  • Insurance-life and long-term disability insurance helps to decrease your income risk-for you and your family.  So insure your human capital!
  • Make sure your education investment risk-the huge amount of money and time required for your degree-is protected by a likely chance you can repay that investment.  (Don’t borrow tons of money-for a career with no possible chance of bringing in the income required to pay for the education!)

Financial Risk:

Think it over.  Do you have income or job risk, that you are not taking into account right now-if so, make adjustments.  Change your investments to something more conservative and liquid.

Think about what your steps would be if you lost your job or had a decrease in pay.

Don’t be caught  with your scrubs down around your knees.  Don’t spend  all your time worried about your investments-and not enough concern about your primary money factory:

YOU AND YOUR JOB!

Reader questions:  What are your thoughts about risk?  Do you think we balance our job risk and investment risks appropriately?

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Posted in Retirement savings, Wealth building | 2 Comments »

Borrowing From Your 401-k or 403-b: Does It Make Sense?

Thursday, June 10th, 2010

Borrowing Money From Your 401-k or 403-b

Your favorite nurse (you)  return home, after a difficult 12 hour shift.  One patient complained to your shift supervisor that you didn’t respond to the call light quickly enough-(after ringing it every thirty minutes the whole shift).  One of your co-workers stayed on the phone  with her boyfriend.

You walk into the door, planning to take a hot bath and relax (after you feed the kids and clean-up after your husband!).   And it is sooo hot.  You check the thermostat-yea it’s set at 76, so why is it 90 degrees inside??

Of course, the AC guy, when he finally comes by, after you spent a miserable night in your sweltering home-gives you the great  news.  Your condenser is shot-”We can get you a great new model-it will even save you  money on your power bill.  It  has this neat green energy label on it, too-for  JUST $4,000 bucks.”

“You guys got a payment plan?” you ask-knowing your savings balance….and hoping for compassion.

“Uhhh, no, we do AC- we ain’t no bank…..” is the quick reply.

Well, you call your bank, and they aren’t loaning money without collateral right now.  You call your parents, and they are tapped out too, (or too smart to loan you money-they KNOW you!!!!)

You go to work, stressed out about where you are going to get that kind of money. You have heard your friends talk about “The Millionaire Nurse Blog” and getting control of their finances, but you have just been too busy to bother.

Then during the middle of your shift, you overhear two co-workers talking about borrowing money from their retirement account-the same 403-b that you contribute to, (1%, but at least it’s  something).  And you think-”That’s the answer to my prayers-I’ve got $15,000 in that account.”

You do one of these little dances:

So you make the call to the  benefits manager and get the ball rolling on paperwork.

What’s the skinny on 401-k or 403-b loans?

  • Some accounts don’t allow loans.  Depends on the plan’s rules, which are different for every employer.
  • You can’t borrow more than 50% of the account, and most have a  $50,000 cap.
  • Most do not allow you to continue to contribute, until the loan balance is paid.
  • Interest is usually floating, based on the prime rate plus  a specified amount.
  • Most have to be repaid within 5 years.
  • If you quit or get fired, the loan will have to be repaid within 90 days in most cases- or it will be considered a disbursement-and you will also owe the feds taxes and a 10% penalty due immediately, (unless you are over 59 1/2.)

So what does all this mean-?

Is borrowing against a 401-k or 403-b a good thing or not?

  • Avoid borrowing unless no other choice -is usually my mantra!  This is your retirement we are talking about-Ramen noodles when you are 70 doesn’t sound too appetizing to me!
  • If you have no other choice but bankruptcy, then this may be a good time to borrow.   The stock market and bond returns are crappy.  Maybe you will get lucky and the interest you are paying to yourself will outpace returns you are getting with your investments.  “Blind hogs finding acorns and all that!”
  • I would get an extra job, work overtime and sell my stuff to pay this back as quickly as possible.  Don’t depend on the timetable for withdrawal from your check over 5 years to pay off the note.  Get after it!!!! Too much can change in your life over 5 years that could make this bad idea, even worse!
  • Remember, your opportunity costs include  whatever growth your account would be earning, and the additional funds you are not investing every pay period.
  • And this is why you need a savings cushion-don’t let your life always be one speed bump away from a crisis.  Read this post on developing emergency savings, and this on why you need a little financial margin in your life.

And if you want to read other takes on borrowing against a 401-k or 403-b, check out these articles:

Reader Questions:

What are your questions and concerns about borrowing from your retirement fund? Have you done it and what were the consequences?

Do you have other suggestions for folks in need of emergency money, that don’t want to put it on a credit card and have no savings?

Let us hear from you.

Dr Dean

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Posted in Retirement savings, Uncategorized | 3 Comments »

Roth vs Traditional IRA’s: A Video Discussion

Thursday, April 15th, 2010

Roth vs Traditional IRA’s

Roth and Traditional Ira’s-a topic of a great deal of discussion.  I have written previously about these differences in a recent Investing 101 post.

This subject is still “greek” to a lot of folks, if my discussion with my nurse friends is any indication.

Comments like, “What the hell were you talking about-I didn’t understand a word you were saying!”  Or, “you lost me when you started discussing the different stock   indexes like the Russell 2000, what the heck is that?  Is that similar to a Jack Russell Terrier or something??????

So my goal is to continue to break these investments issues into small segments, and allow things to sink in.

As I was taught by the senior residents, when I was an intern-Practice, Practice, Practice-we are only letting you admit every patient for the next 72 hours, because we are here to help you learn!!!

So I taped this video, the same day I taped the one about  opening a local brokerage account, at a bricks and mortar office-something that intimidates a lot of folks.

In this video today, Hal, a registered broker is discussing a few of the differences between Roth IRA’s and Traditional IRA’s.

Take Home Points in  the Roth/Traditional IRA decision tree:

  • Both are better than neither.
  • They offer a way to put away more money for retirement, than you might be able to put into your work IRA
  • They are more in your control than your 401-K or similar work accounts-the choice of investments is almost endless!
  • The Roth IRA is more limited by income as to who is eligible
  • The Roth is usually considered non-deductible but is tax free on withdrawal
  • The traditional IRA is a tax deduction for most eligible folks but is taxed  on withdrawal.
  • But as I said in the first bullet point-either one is better than nothing!!!

If you have any questions, please feel free to let me know.

I will do a  few posts soon-interviewing a CPA-with their  thoughts on these issues from a tax standpoint.  As  soon as they get over tax season-Tax season to a CPA is much like Christmas shopping season to a retailer, it is good for the bottom line, but heck on your Family Life!!!!

Thanks again to Hal, and Julie at Warren and Brannen Inc. for their assistance.

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Posted in Personal Finance 101, Retirement savings, Uncategorized | 2 Comments »

Roth IRA’s: The Millionaire Nurse Way!

Tuesday, March 2nd, 2010

Everyone knows what a Roth IRA is, don’t they?  No, even if you think you do, you probably  don’t-so let’s have a little ROTH IRA school.

Roth IRA’s got their name from  the late Senator Roth from Delaware.

The difference between Roth IRA’s and Traditional IRA’s:

  • You pay taxes on the money as it is deposited into a Roth IRA-with a traditional IRA, you take an income tax deduction at your current federal rate on the deposit.
  • The government  taxes withdrawals, and also tells you when you start to take money out of the traditional IRA.  Money taken out of a Roth is not taxed, and you can remove it when you want to-after 59 1/2.  (With some restrictions.)

Similarities:

  • They both allow investment in many different types of securities, stocks, bonds, and even real estate.
  • They both are limited in the amount you can deposit, based on age and income requirements.

So how do you decide what retirement vehicle to use? 401-K, Roth, or traditional IRA….

If you company matches- deposit up to the matching amount in your 401-K.  For most middle income folks, the next decision is the hardest-if you can afford to pay the taxes, I would deposit the next part of retirement savings in a Roth IRA.  When that was maxed, I would  save the rest in a traditional IRA.  (Until you reach at least 15% of your income.)

So what does this mean in the real world-lets say you are a married nurse, and your spouse makes the same 40,000bucks/ year for a gross income of $80,000 for you as a couple.  If your company matches 3% of your income in their 401-K then,  put $1200 in that account-(3%).   Now you can put up to $5,0000 in your Roth, if you are under 45-so let’s put your remaining $4800 in your Roth-which gets you to 15%.  With the company match, that gives you $7,200 in your retirement savings for the year.

Now remember, you have to pay taxes on the $4,800 you put in your Roth, at whatever your income tax rate is, both state and local.  However, when you remove that money, the balance and the growth from your investments can then be withdrawn tax free. WHEN YOU WANT TO-after retirement-not on the governments schedule, as a traditional IRA requires.

Now keep in mind, the example above includes estimates and generalizations, so to make your own decision you need to have your tax information handy.  And if you really want to dig into this further for all the exceptions/explanations, then check out Wikipedia’s Roth IRA section here.

“Dr Dean, Now that my head is spinning, what do I do?”  Well if you want to open a Roth IRA, then you need to talk to a discount, or  full-service broker and open an account. The brokers usually require a minimum investment,.  Many savers are successful having the money electronically deposited into the IRA, so they aren’t tempted to spend it.

So go get started on having a secure retirement.  You want to be eating steak, or asparagus during your retirement, not canned soup.  You want to travel the world, not your one bedroom apartment……

Let me know if you have questions.  That is what I am here for.

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401-K Rollovers, How do Millionaire Nurses Do It?

Wednesday, February 17th, 2010

A 401-K rollover, is not an exercise like P-90X and it is not another futuristic movie title.  A401-K rollover is what you  do with your company retirement money, when you leave your current job.

Let’s say you have been working at hospital A for twenty years, and have built up a significant amount of money in your 401-K (or 403-B).   Now you have been offered a big promotion and raise to work for hospital B.

What do you do with your money?  Well, it depends on tons of factors, but lets work through a few of them.

  • Your plan at your old company may require you to move your money-most don’t unless it’s less than $5,000.
  • If you think the old plan is great, and the hospital is stable, you can leave it there-be sure to keep up with it, with change of address notifications, if you move.  You don’t want to lose touch with your money!!
  • If you want to move the money, then you need to do a “Rollover”.

So what are your “rollover” choices:

  • Have your money “transferred to your new employer.  Make sure you like the options in your new employers retirement accounts-if not keep reading.
  • Rollover the money into a traditional  IRA-either with a brokerage, or a mutual fund company.
  • Rollover the money into a Roth IRA.
  • Let them send you a check for the money-go have a big party, buy a new car, new clothes and Jimmy Choo’s!

All of the above are fine except the last one!  If you take the money and run, your old employer is required to send 20% of the money to the feds for taxes, as they consider this income, and if you are under 59 1/2 they also slap you with a 10% penalty (yes that money is gone) for being stupid!!!!

As to whether to choose a traditional IRA or Roth IRA depends.  The advantage of the Roth is that your money when you withdraw it, is tax free.  When you withdraw money from a traditional IRA, you pay taxes on the money at whatever rate applies-IF that is very little money, and your income is low, then the taxes may be low.

However, if you spend the next 40 years learning to act and then become a “Millionaire Nurse” then those taxes may be significant.  So, if you can afford to pay the taxes on the money now, then conversion to a Roth IRA, I think, is the best decision.   Now companies that manage Roth IRA’s, have calculators that you can play with to help with the decision.  And you can do both, have part put into a traditional and part a Roth.

But you still are having to “guess” at what you tax rate will be when you retire.  And I can only guarantee one thing-the odds of any of us “guessing” correctly is near zero!!!  So as I have said before, don’t have paralaysis by analysis, do your best due diligence and homework, then push the damn button!  EXECUTE!!! (sorry, but sometime you have to get people’s attention.)

Now to discuss all the implications of buying stocks, mutual funds, and deciding how to invest in your new IRA Rollover is worthy of a book, or at least several posts here-so we will deal with that in the future… I know, you can’t wait!!!

Now, as to how to actually arrange the transfer, you have to be proactive.  Call your benefits people at your old employer, and ask them what paper work you need to fill out to move your money.  Ask the people that you are moving the money to, what paperwork you will need to fill out, so they can accept the money,-without it disappearing in cyberspace…. So make sure both ends are covered.

If you aren’t sure if you have filled out the forms correctly ask for help-if you can’t get any one to help, then maybe you need your new financial company/brokerage folks to help, or even get an independent financial advisor to do so, and pay them their hourly rate for assistance.  Just keep bothering people on both sides  of the transaction till it gets done!!!

So let me know your questions or comments. There are plenty of exceptions to the above rules-special circumstances for withdrawal without taxes or penalties, such as disability, etc.  So, keep that in mind.

There will always be unusual exceptions.  Like the old saying in medicine-when you hear hoof beats, don’t expect to see zebras-but every now and then, a zebra will show up and bite you on your “donkey”….

If you have done a “rollover” let us know how hard or simple it was.  What was your experience?

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Posted in Personal Finance 101, Retirement savings, Wealth building | 8 Comments »

Bond Funds: 401-K Investing for Millionaire Nurses-Continued

Wednesday, February 10th, 2010

I want to continue my 401-K investing course for nurses-and whoever else reads today- by focusing on Bond Mutual Funds.    I have received a few comments, that some don’t understand this investing stuff.

The only way to understand anything, is first to decide it is important.

If being financially solvent when you retire is not important to you, then you need to wake up, and smell the Narcan!

If I am unable to explain it in an understandable manner-then please ask questions.  Remember, the first time someone talked about anaerobic bacteria, you looked at them and said, “Do What?”  So keep reading, and little by little, these terms will gradually mean more to you.

I want to discuss Bond mutual funds today.  Bonds are a term used when corporations borrow money, and promise to pay the money back, over a period of time, with a certain interest rate.  Bond’s can be long term-15-30 years, intermediate, 5-15 years, and short-term-less than 5 years.

Now interest rates tend to be higher, the longer term the bonds. Because the risk something could happen to the company over 30 years is higher than something happening over 5 years-so companies have to pay you more to take that greater risk.  Therefore the interest rate paid on long term bonds is higher.

Now most 401-k plans, don’t have individual company bonds for you to invest in. They usually have a mutual fund that holds a bunch of bonds.  Now, in the past, bond mutual funds, were thought to be more conservative or safer than stocks.  That is, until, a bunch of companies go bankrupt-and bondholders lose usually all of their money.

But a mutual fund  may be holding hundreds of different companies bond, it is unlikely you will lose all your money.  However bond mutual funds are subject to what is called interest rate risk.  This means, that if interest rate rise higher than what the bonds rate was when it was sold, it goes down in value.

If you are holding the bond till its maturity date-which means 30 years if it is a thirty year bond-you are guaranteed the rate it was sold at-so you will have that return on your money.

However, many mutual funds “trade” bonds, this means they sell them to other companies/funds/individuals for the going rate, betting the interest rates will change for the better (for them).  Check out this article on bond funds.

So, this matters to you why????

Well, picking the right bond mutual fund, is important, because some managers do better at the choosing/trading than others.

So when you have a choice between several bond funds, what do you do?  I would look up the fund on Morningstar.com or some other financial website and look at the long-term track record of that fund, compared to its competition.   If it rates high, go for it.  If it rates at the bottom, check out your other options, and pick the best rated one you can.

Many 401-k plans don’t have pure bond funds.  They have funds that are mixed with stocks holdings and bond holdings.  These are good funds, if you don’t want to have to think.

In general, if you are going to use one of these blended funds, the older you are- the higher the bond holdings should be, over the stock portion.

In other words, if you are just 20-you may want 80-90% stock and 10-20% bonds, then when you are 60 just the opposite.  This is because, in general bond funds are less likely to drop as low, in value, in bad times.  So that means less risk- not no risk, just less risk.  But, most experts recommend always keeping some of your retirement holdings in stock, because you need the growth potential-especially if you end up living to age 90 and above, (the chances of which, increase every year!).

When you are older, you don’t have as much time for the stock portion of the fund, to bounce back from it’s losses before you may need the money.  So you decrease your exposure to stocks as you get older, not eliminate, just decrease.

You don’t want to plan to travel in retirement, to find you can only afford to drive to the mailbox-to see how bad your stocks are doing.

So this is the end of our latest version of 401-K 101.  I hope you have enjoyed the show, I mean, post.  Really, I just hope you managed to read this far-only weird people like me like to read about this stuff.

So go forth, and scare the bejesus out of your benefits administrator the next time you get your 401-k report. Ask questions and make good  thought through decisions, rather than just closing your eyes, and picking.

We will continue this discussion another day, after you have had some coffee/tea/Red Bull.

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401-K:The Quality of Your Retirement May Depend On It!!!

Tuesday, January 26th, 2010

It amazes me, when I ask the nurses at the hospital how they have invested their 401-K money.  What kind of funds do you have?   I usually get the shrugs, the “I don’t know-I just did what they told me to do.”

Now there has been a big debate over the last few years on how to get people to pay more attention to retirement.

We all know that the odds of social security being there for us in our old age is between slim and none.  And if it is there, then the amount of money we will receive is unlikely to be enough to live a quality retirement.

I can hear it now-”Where do you want to eat out Friday, Harold?”  “Well, we can splurge honey,  cause I just sold some plasma, and found a bunch of cans this week!” “Dairy Queen, here we come-we may even be able to share the mini-sundae to go with our burger!!!!”

Maybe it’s because I am closer to retirement age than I am 20, but time passes in a hurry, and the better plans you make now, the smoother and more freedom you will have in retirement.

So today, as promised last week, I want to define a few terms to help with making decisions on where to put your 401-K money.

Now, when you are hired, or once a year, a benefits administrator will meet with you to explain what your 401-k options are, and to make changes in your choices if you have any.  Before you go the next time, I want you to be more informed, so will continue this series over then next few months.

So today, I want to talk about Index Funds.  As I mentioned last week, index funds hold stocks that make up an Index.  Common indexes are the S&P 500, the Russell 2,000, 3,000 and the Wilshire 5,000.  Is this a Stock Car race???

No the numbers are how many stocks make up the index.  The S&P 500 index holds 500 stocks, the Russell 2,000 contains 2,000 stocks….

Now, if the index holds 5,000 stocks, then it is holding all of the stocks of any consequence traded on a major stock exchange-like the NASDAQ or the New York Stock Exchange.  Now to make it even more complicated, the amount of each company stock, such as Coca Cola, is dependent on the “market capitalization” of each stock-that is the number of shares of that company that trade on the exchange, multiplied by the price of the stock.

So if a company has a market cap of 500million, and another has a market cap of 250 million, then the first company will have twice as many shares in the index.

Now to add another wrinkle, the mutual fund companies, can decide that they want to limit some companies from being in their “index fund”.  So their index fund may not be a true index fund-holding all the stocks-they may just hold stocks from that index that meet certain earnings criteria.  They do this to keep from buying what they consider “dogs” or poorly run companies.

Now, this is enough info on index funds for today.  In another post, I will explain in a little more depth, how to choose which index fund for your retirement account.

This stuff has to be dealt out in small doses, or it can become overwhelming in a hurry.  But like any of your classes in nursing school, you have to start somewhere.  And the more you read and study, the more sense this will make to you.

Now, if you need to know more in a hurry, this article on index funds is a good overview, but again, until you begin to understand the special language of investing, it may be difficult to comprehend on the first go-round….

So let the learning begin!!!!

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"PAD" Your Savings: It Should be "Planned, Automatic and Done!"

Monday, January 18th, 2010

Saving money, is not done just for the sake of saving.  To be most successful, develop a goal and plan.

In medicine we develop a treatment plan or guide.   If the diagnosis is heart failure  then doing a chest x-ray, blood gas, give diuretics and so on…..,

As circumstances and facts change, then adjust the treatment plan.

What happens in cases where there is no plan? Here is an example:

You have three doc’s consulting on the case, they all write conflicting orders, the nurses have no idea who is in charge.  At best, the remarkable being that made the human body comes through and the patient gets well anyway.  At worst, an injury or event occurs that slows down  progress-drug- drug interaction, allergy, or infection occurs. Frugal lawyers get involved….Makes me shudder to think about it.

So how does that compare to your personal finance and savings.  Those that have a plan, and direction will always win.  Doesn’t mean bumps in the road don’t occur, but you have plans in place to deal with them.

So what do I want you to do about the Savings part of your personal finances:

  1. Determine what your savings needs are-home down payment, car upgrade, new tires,  or retirement.
  2. Make sure your emergency fund is in place. See this post about my recommended Super-Duper Emergency Fund.
  3. Once you determine the need then decide on how fast you can meet the goal-10 bucks a week or 100 bucks a month.
  4. Make your savings automatic: your 401-k is usually painless, because it comes out without your thinking about it.  So do the same with all your savings-have the amounts you choose drafted right after you get paid, to the right accounts or sub accounts.
  5. Review every three months for adjustments.  If you gradually increase your savings rate, it is much easier to reach goals, without everyone in the family having a heart attack-”What do you mean, I can’t go to Old Navy this weekend?”

So go “PAD” your savings-”Planned, Automatic, and Done!”

Housekeeping:

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401-K 101: The Basics of Retirement Investing for Millionaire Nurses

Tuesday, January 12th, 2010

A recent survey of nurses showed personal finance or “money worries” were their chief concern, so over the next few months I will try to post at least one article a week on basics of personal finance.  This might include planned spending, retirement accounts, banking, credit cards and saving in addition to commentary,and punditry.

These basic articles may be boring to some, but fast forward to the years immediately before retirement, and you are thinking-”What am I going to live on, and how will I get by?”-then you will be glad you plowed through, and even more importantly, learned and executed on these recommendations…..  So let’s get started!

401-K’s got a vote of confidence, in a couple of surveys discussed in this article in the “Wall Street Journal”.  They report that the majority of 401-k holders kept their money invested, even during the severe market drop in March of 09.  Why is this important?  Because since that drop, the market has been up more than 30 %.  So the money you had invested during the drop has come back in value substantially-you are still not even on that money, but getting close.

(Now for those of you who may have another version of 401-k such as 403-b accounts-all we say here applies.  If you have no retirement account provided through your job, we need to talk!!!!)

More importantly, however, is that the new money that has been taken out of your check (pre-tax) has grown significantly since March 09-you bought at the bottom!!!!!  Good Job!

Of course, who knew when the stock market would hit bottom-nobody!  There for a while, it seemed as if the earth would stop spinning, the financial world was such a disaster.

Another article, discusses the argument about buying index mutual funds vs actively manged funds in your accounts. This article discusses a few advantages and disadvantages of the two type funds-but keep in mind, when stocks or mutual funds are in a retirement account forget about the fourth tip in the article-funds in retirement accounts are not taxed- on long or short-term capital gains.  One of the main advantages of investing in a 401-k or IRA-you get tax free growth.

First a few definitions.

Index funds:  These funds buy all the stocks in whatever index they are trying to mimic.  So a S&P 500 index fund holds all the stocks that make up that index.  So that mutual fund will go up or down the percentage rise and fall  of that index.   The stock holdings in that fund don’t change much, as changes in the stocks that make up an index don’t change often.   There are many other “index funds”-Russell 2000, Russell 1,000, S&P 500, and 100.

Therefore, the fees that occur when holdings are changed within a mutual fund are much less than average.  There are many different types of index funds, Dow index, Russell 1,000, and Russell 2,000 are a few popular ones, in addition to the S&P 500.  Vanguard is a mutual fund company, whose founder, John Bogle, made these funds famous.  But all investment houses, from Schwab, to Fidelity have their versions.

Actively Managed Funds: These funds have a manager or investment committee that makes decisions about which stocks to buy in their fund.  They may trade frequently or infrequently.  The difference between those that trade a lot, is that fee’s are higher.  One of the problems with these funds is that if they have done well under a manager, and the manager leaves, what will happen?  Who knows, but it might not be good-definitely worth watching.

So, what is a Millionaire Nurse to do?  Well the Millionaire Nurse at a minimum finds out what funds are in their  401-k.  Write the name of the fund down, and go to Morningstar and look the fund up.  You may find that everything is Greek-hey, if financial folks read a medical file-they would think that was Greek (more like Latin).  Find out how well your fund is doing compared to similar funds.

I think there is a place for both type funds, but if you don’t want to learn about them, then the index funds are the way to go.  Find one with low fees if it is offered in your plan.  Many plans only have one of each type to choose-that makes it easy.

Get the retirement plan managers to answer your questions about the type of fund, and how it is doing compared to its peers.  When your benefit administrators are at your hospital or other place of employment-don’t be afraid to ask questions-they may not give you investment recommendations-but they should be able to explain your options.

I will do another post later on the different types of managed and index funds, because I don’t want to overwhelm you with information, today.  You didn’t become a nurse in a day-and you will not be a financial expert in a day-but you have to start learning-and learn you will.

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Posted in Personal Finance 101, Retirement savings | 2 Comments »

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